BOND REPORT: Treasury Yields Try To Climb From 2017 Lows

U.S. Treasury yields rose slightly on Thursday, with the 10-year benchmark note attempting to coming off its lowest level in 2017 after the Federal Reserve delivered its fourth interest-rate hike in about 18 months and outlined plans to unwind its $4.5 trillion balance sheet.

The overall hawkish tone of the central bank's updated policy statement and a question-and-answer session on Wednesday following its decision was read by some as underscoring the Fed's desire to normalize monetary policy, despite sluggish inflation.

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The 10-year Treasury note ticked up 1.1 basis point to 2.149% point, compared with 2.138% late Wednesday in New York, which marked the lowest yield for the benchmark note since Nov. 10 (http://www.marketwatch.com/story/us-10-year-treasury-yield-drops-to-lowest-since-november-ahead-of-fed-policy-update-2017-06-14). The 2-year Treasury note--the most sensitive to interest-rate moves--rose 1.3 basis point to 1.356%, compared with 1.343% in the previous session, while the 30-year Treasury , known as the long bond, edged up 0.6 basis point at 2.789%, compared with 2.783% late Wednesday.

Bond prices and yields move inversely and one basis point is equal to one hundredth of a percentage point.

On Wednesday, ahead of the Fed's policy update, yields jolted lower as key measures of inflation suggested that the central bank may be inclined to temper its pace of rate hikes. A U.S. government report showed that the consumer-price index in May was up 1.9% (http://www.marketwatch.com/story/inflation-falls-again-in-may-as-cpi-recedes-from-recent-high-water-mark-2017-06-14) on an annualized base, dipping below the Fed's 2% target again. Excluding food and energy, CPI rose 1.7% over the past 12 months through May, representing the smallest gain since May 2015.

Inflation tends to erode bonds' value over time, with a signal of easing inflation sparking some buying in government paper, driving yields down.

However, Yellen & Co. offered a relatively sanguine outlook for inflation and the U.S. economy at her Wednesday afternoon news conference, cautioning Wall Street "not to overreact to a few readings," even as the Federal Open Market Committee lowered its inflation outlook (http://www.marketwatch.com/story/fed-raises-rates-and-sets-plan-to-shrink-balance-sheet-this-year-2017-06-14).

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"This combination of a hawkish take on the recent inflation news and a continued emphasis on forestalling excessive labor market overheating left the dots fairly stable," wrote Goldman Sachs strategists Jan Hatzius, Alec Phillips and David Mericle in a Wednesday research note, after the Fed"s decision, which included a quarter-point rate increase to a range between 1% and 1.25%, as widely expected.

Goldman's analysts said the U.S. central bank reinforced the notion of at least one more rate increase in 2017, but the investment bank says the probability of a rate increase in September is only 10%, forecasting that the next rate increase will likely be in December, given the Fed's balance-sheet reduction plan, which can serve as an added tightening tool.

The Fed said it would shrink its balance, setting a cap of $10 billion a month and then raising it to $50 billion a month. If implemented, this means up to $300 billion in balance sheet reduction in the first 12 months and up to $600 billion a year thereafter.

One area of concern for is a narrowing risk premium between 2-year and 10-year notes, which fell to 80 bass points on Wednesday, marking the narrowest level between those short-term and long-term instruments since July. A shrinking premium, or flattening yield curve, is read by some market participants as signaling a dimming outlook for inflation and the economy.

Looking ahead, investors are awaiting a number of economic reports, including weekly jobless claims, May import prices, New York's June manufacturing activity and the Philadelphia area's June business conditions.